AT&T’s skinny bundle DirecTV Now hit 1.8 million subscribers at the end of June, per AT&T’s Q2 ’18 earnings report, released yesterday. DirecTV Now added 342K subscribers in Q2 ’18, compared with 152K in Q2 ’18 and 312K in Q1 ’18. DirecTV Now’s gains more than offset the 286K traditional DirecTV subscribers lost in the quarter (almost double the 156K loss from a year ago), with U-verse also adding 24K (vs. a loss of 195K a year ago). Overall, AT&T ended the quarter with 25.449 million video subscribers compared with 25.172 million in Q2 ’17.

The big boost for DirecTV Now in Q2 reflects AT&T’s ongoing emphasis on attractively packaging the skinny bundle with its unlimited wireless service in order to bolster the latter. I have been writing about this “video as bait” strategy (which other wireless carriers are pursuing as well) for over a year now, although AT&T is clearly the most aggressive. In fact, with its recent launch of the uber-skinny “Watch” service, and multiple price points for DirecTV Now, AT&T is creating numerous offers for customers to choose from.

On the earnings call yesterday, John Donovan, CEO of AT&T Communications, talked at length about this strategy and importantly how it enables AT&T to address cord-cutters and cord-nevers while also cannibalizing full-paying DirecTV subscribers. Donovan said the company is keeping a close eye on margin erosion as it seeks to maintain a 25%-30% share of the pay-TV market. He also noted that because the subscriber acquisition costs for DirecTV Now are much lower, over time as volumes grow, margins should improve.

Despite this confidence, the impact of traditional DirecTV’s accelerating shrinkage and DirecTV Now’s limited profitability are having a clear impact on AT&T’s current income statement. The 872K fewer DirecTV subs in Q2 ’18 vs. Q2 ’17 contributed to a 9% contraction in quarterly video entertainment revenue, from $9.2 billion a year ago to $8.3 billion in the most recent quarter. Overall Entertainment Group contribution slid from $1.6 billion in Q2 ’17 to $1.4 billion in Q2 ’18.

More broadly, AT&T’s DirecTV Now push means the company’s overall share of the skinny bundle market is continuing to grow. Importantly, AT&T is contributing to educating consumers about how they can pay far less than they’re accustomed to paying for pay-TV service while still getting a pretty solid variety of channels.

That’s bad news for traditional pay-TV operators who don’t have a skinny bundle of their own to use even as a retention tactic (which is why Comcast’s Q2 earnings, including their video sub numbers, which come out tomorrow morning, will be fascinating to review). And by now owning the Turner networks and HBO, AT&T has further freedom to experiment with providing low cost video bundles. All of this means AT&T is going to be a highly disruptive influence on the pay-TV market for a while to come.

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